No case for taxman

A Supreme Court order has shagged off the taxman from the backs of industrialists and on the way saving them a whooping Rs 900 crore. A Kashmir Life report

Right now, it is jubilation time for the industry in Jammu. As the taxman lost his case and a bit of face too in a Special Leave Petition before the apex court, the wallet of the scores of entrepreneurs was saved. At stake was a whopping sum of Rs 900 crore which the taxman had claimed as the governments cut from the excise refund of Rs 3800 crore.

For all these years, says an excited industry chieftain Sanjay Puri we have been telling the authorities that the means adopted by the taxmen were illegal. “They never took us so seriously even though the state government fully backed us,” he said on phone. “But now there is relief as the apex court has upheld what we have been saying all along.”

Though some of the aggrieved businesses in Jammu had petitioned the IT over the issue, the relief came from a different front. Manufacturers of Zarda, Dharam Pal Prem Chand Ltd, whose facility is in North East had challenged the IT order in the Delhi High Court, a case it won. Later, the apex court upheld it. The order will impact the industry in Kutch (Gujarat), North East and J&K.

=It involves the industry specific package that the then Prime Minister Atal Behari Vajpayee government announced on November 14, 2002 for a decade. Apparently aimed at helping state manage its massive unemployment load and tide over the infrastructure index. Apart from 100 percent excise duty refund for new ventures and substantial expansion of the existing ones (25% additional expansion); the package offered capital investment incentive of 15 percent within three million rupees ceiling; full reimbursement of insurance premium on capital investment; and three percent interest subsidy on capital investment. Besides, the investments were exempted from income tax for five year with concessions for subsequent five years as well.

This was over and above the set of 24 concessions that the state government was offering from its own resources under its own industrial policy.

The twin packages did help. Scores of major industrial houses from pharmaceuticals, metallurgy, leather, white goods created a beeline to get their projects approved. By now, sources in state’s industry ministry said total investment of Rs 4187 crore took place. Most of it is in production but part of it is the final stage of implementation. Given the proximity with raw material and the market, most of this investment took place in the identified industrial areas of Samba, Kathua and Jammu. Kashmir being far away did not attract any investment but some local entrepreneurs did invest in the cement sector.

Excise refund continued as the main attraction. By the end of 2008-09, the units in J&K have already claimed excise refund of Rs 3438.68 crore and this amount is now unlikely to be taxed. Excise refunds started with Rs 117.44 crore in 2004-05, increased to Rs 535.13 crore in 2005-06, Rs 820.28 crore in 2006-07 and peaked at Rs 1264.41 crore in 2007-08. For the fiscal 2008-09 the excise refund dipped to Rs 642.87 crores. By the end of current fiscal this is expected to cross Rs 3800 crores.

Given the quantum of refunds, it became clear that the total investment was almost the same as that of the excise refunds claimed by the entrepreneurs. It attracted the attention of the Revenue Intelligence that, according to reports, produced a voluminous reports about how the package is being misused, an allegation that has not been proved so far. In post haste, the union finance ministry issued a notification on Mar 27, 2008 amending the earlier notification thus devoured the package from the main attraction – the excise refund. It permitted excise refund to the level of value addition only.

Says Puri: “Average incidence of central excise duty was 10-14%. Typical value addition in industry is only approx 5-10%. Since the exemption would now be given only to the extent of value addition, the excise exemption benefit to the industry in J&K has been effectively reduced from 10-14% to mere 0.5-1.5%.” This became a rare instance of a package being rolled back before completing its term. There was no change in Uttaranchal and Himachal where the excise duty is totally exempted.

Immediately after, some of the industries reduced production and a few that were about to start implanting their projects halted. There were instances of capital flight to neighbouring states. Cement manufacturers were only beneficiaries of the new system because their job is mostly value-addition, admits Umar Khursheed Tramboo of the Khyber Group, state’s cement leader.

But the industry was ready for another shock. The taxman ruled that the excise refunds being claimed by the entrepreneurs fall under the ‘income from other sources’ category and can not be exempted under 11B of the Income Tax Act 1961. This had actually started on Mar 31, 2006 when Income Tax Officer (Ward 1-1 Jammu) raised a demand for the account of refund from M/S Ace Engineering, Bari Brahmana. A year later on March 13, 2007 A K Thatai Commissioner Income Tax (Appeals) Jammu passes an order in favour of M/s Ace Engineering. But Thatai was prematurely transferred to Cochin on June 25, 2007. His successor Raj Kumar passes a revised order in favour of department. On Nov 26, 2009 M/S Ace Engineering’s appeal was dismissed by ITAT. The CII J&K took up the issue with the chief minister Omar Abdullah on February 10, 2010 following which a meeting took place between the industry, state government and the union finance minister Pranab Mukherjee on February 13.

It did not help the industry on the tax front. But there were two decisions that helped Kashmir. According to Federation Chamber of Industries Kashmir president Shakeel Qalander the order was amended and the prevailing excise package was extended to a decade and the package was made location neutral. “Now any unit coming up anywhere in the state would be eligible to all the concessions,” says Qalander. “Earlier the package would be extended to the existing units only if they invest 25 percent more in machinery but the new order makes them eligible for the same package if they increase their manpower by 25%.” It left the tax problem un-addressed and the relief came from the apex court.

The net saving by the entrepreneurs in the state is around Rs 900 crore. But the larger issue is whether this money comes out of the wallets and becomes a fresh investment?